Michael T Barford and Fergus A Falk explain how using expert accountants in completion accounts disputes can bypass the need for expensive court proceedings. Michael T Barford and Fergus A Falk are partners in the forensic services department at Deloitte & Touche.
At a time when the costs of litigation are continuing to rise, businesses are looking for alternative methods of dispute resolution which allow disputes to be resolved more quickly and cheaply.
One method is the use of expert determination, which is frequently employed in completion accounts disputes. This is a distinct and separate process from arbitration.
For the purpose of this article it is assumed that typically a purchase and sale agreement relates to a transaction where the consideration is based on the net asset value derived from completion accounts prepared in accordance with specified accounting principles.
Purchase and sale agreements commonly include a clause specifying that, should the parties fail to agree the completion accounts, the matter will be referred to an expert accountant to resolve the dispute.
The expert accountant will be required to interpret the purchase and sale agreement and determine its application as regards the preparation of the completion accounts. Except in the case of obvious error, the decision of the expert accountant will be final and binding on the parties and is generally entirely confidential to them.
The expert accountant acts in a quasi-judicial capacity and both parties must have confidence in him. Increasingly, parties try to agree between them which expert to use rather than leaving the decision to a third party.
Purchase and sale agreements do not normally specify the precise steps to be taken to resolve the dispute but, in practice, procedures have been developed to achieve a quick and equitable resolution of the issues.
These detailed procedures must be agreed in writing between the expert accountant and the parties on a case-by-case basis. Their prime objectives are to give the parties an equal opportunity to present their case and respond to the other party, and to enable the expert accountant to maintain a level playing field between the parties during the adjudication process.
The expert accountant controls the process on a day-to-day basis and will usually be empowered by the parties to resolve procedural issues.
There is generally a two- or three-stage process – submission, response and perhaps a counter-submission – by which the parties make their case, supported on each occasion by appropriate documentation and evidence of their position on each of the matters in dispute.
A period of two to four weeks is generally agreed by the parties for each stage in the process. The expert accountant needs a right of access to any relevant documentation and will raise questions in writing during the process for response by either or both the parties. He will also give both parties the opportunity to comment on any answers given to him.
The procedures allow for the possibility of an oral hearing, although these are not common.
The expert accountant does not generally have to give reasons in his determination. This reduces the costs and renders it more difficult for an aggrieved party to challenge the expert's decision, thus ensuring greater finality in the determination.
The quality of the submissions to the expert accountant is vital. The submissions should present a clear trail of reasoning and evidence, supporting the adjustments requested, and they should be well argued.
Depending, among other things, on the number of items in dispute, their complexity and the quality of the submissions and counter-submissions, this process can be completed more quickly than a comparable arbitration or litigation process.
The adjudication process is often completed within three months. It will take longer where there are a large number of matters in dispute, but it will still be concluded quicker than if the matter had been resolved in court.
Inevitably the issues raised vary from case to case. Often they include the consistency of application of accounting policies, the interpretation of ambiguous accounting clauses, and the use of hindsight in arriving at the results of the accounting period ending on completion.
With the number and significance of expert determinations looking set to rise steadily, the role of experienced accountants in resolving complex disputes in a constructive way is of ever-increasing importance.